UK Green Investment Bank plc Delivering the UK’s Bioenergy targets, Sustainably June 2014 Speaker: Bruce Duguid, Head of Sustainability and Green Impact WHO WE ARE 2 OUR STARTING POINT Our statutory commitments … … demand unprecedented investment Notes: 1) vs 1990 levels; 2) from 3% in 2010; 3) vs 1995 levels; 4) Source: Vivid Economics. Estimates of required green investment in the UK varies between £220bn and £500bn depending on sources 3 GREEN INFRASTRUCTURE MARKET Historic and projected investment run-rate in green infrastructure* is consistently half the required amount £33bn Average 2007-13 £13bn £10bn £13bn £14bn £16bn £16bn £13bn £8bn Average annual required 2007 2008 2009 2010 2011 2012 2013 2014 * Includes Water & Wastewater, Grid, Energy Efficiency (incl. domestic), Low Carbon Transport, Small Distributed Capacity, Renewables Note: asset finance includes primary financing and refinancings; does not include M&A Source: BNEF, IJ, GIB 4 OUR JOB Our vision: green and profitable Our task: crowding-in capital 5 OUR INVESTMENTS TO DATE £4.6bn 29 £1,3bn £1,3bn £3.3bn £3.3bn 43% 56% 2012/13 2013/14 market share Note: Market share does not include energy efficiency market share 6 UK BIOMASS POWER MARKET OPPORTUNITY Biomass conversion capacity has the potential to increase to c. 2.9 GW from its current level of c. 1.2 GW. Dedicated biomass capacity is likely to be predominantly small scale projects, with only a select number of larger scale (30+MW) projects likely to come forward given the requirements for CHP. Biomass Potential Cumulative Capacity GW 4.5 Total: 3.9 4.0 Drax units 2 + 3 will provide approximately 40% of this additional capacity 3.5 3.0 2.5 2.0 1.5 1.0 0.5 - 2.9 Total: 1.8 1.2 0.1 0.3 0.3 0.9 Current 2020 Potential Dedicated Cofiring Co-firing capacity likely to decrease as current ROC regime favours full conversion over co-firing Likely to be predominantly small scale (<30MW) projects, many with CHP; Approx 50% is virgin biomass Conversion Source: GIB estimates 7 UK MARKET VIRGIN BIOMASS OPPORTUNITY Size of virgin biomass pellet market in 2020 is likely to be in range ~8-16mt, but projected to reduce significantly post-2027 Scenario GIB Potential Scenario2020 National Grid Lower Biomass scenario 2020 GIB Potential 2030 Virgin biomass Biomass Pellet capacity energy tonnes (GW) (TWh) 3.5 1.8 0.5 27 14 4 Green Metric Tonnes Notes 16 2.9GW conversion, 0.1GW co-firing, 0.5GW 26 dedicated biomass capacity (incl CHP) 8 1.7GW conversion; 0.1GW dedicated virgin 13 biomass 2 Only dedicated biomass plants operate post4 2027, of which 0.5GW virgin biomass Notes: (1) Assumes pellets with calorific value 5.3kWh/ kg; 10% moisture; GMT: ODT ratio 0.55 (2) National Grid Scenarios 2013. Low Biomass scenario assumes 1.7GW conversion; 0.3GW Dedicated. Higher Biomass scenario assumed 3.4GW conversion; 0.6GW Dedicated 8 CASE STUDY: DRAX POWER Summary Full conversion of 3 of 6 of Drax’s 660 MW coal fired power generation units to sustainably imported biomass. GIB provided £100m of senior debt for the conversion, £50m of which was subsequently refinanced by Infrastructure UK. Green Impact Finance • Potential to contribute up to 14 TWh of renewable • The GIB term loan facility of up to £100m was electricity annually, >10% of the UK’s 2020 made alongside the Prudential and M&G UK renewable electricity projection . Companies Financing Fund who committed equivalent funding on similar terms. • Saving average of ~2.5mt CO2e p.a. • GIB’s participation in the term loan facility was an • Ensuring that Drax’s feedstock meets strict integral part of Drax’s capital raising programme, sustainability criteria, including greenhouse gas which included £225m of senior debt, a resized emissions, broader feedstock sustainability, as well £400m revolving credit facility and an equity raising as robust monitoring and verification requirements. of £190m. 9 UK BIOMASS SUSTAINABILITY REQUIREMENTS UK Government announced new approach to standards in 2013, for reporting in 2014 and mandatory compliance from 2015 New standards from 2014 - 2019 • Supply chain GHG emissions performance standard – new trajectories • Sustainable forestry standards • Reporting of wood quality profiling data • Independent assurance of sustainability data (ISAE 3000) Commitment to further Bioenergy Strategy review for standards post-2019 • Wood quality requirements • Carbon stock monitoring • Indirect land-use change impacts Current UK sustainability criteria are ‘Grandfathered’ over the period to 2027 for all projects commencing pre-April 2019 (subject to EU or Int’l law) 10 LATEST SUPPLY CHAIN GHG EMISSIONS REQUIREMENTS) GHG limit varies by type of plant and over time, with different thresholds for annual average vs. single consignments DECC mandatory GHG trajectories for solid biomass and biogas feedstocks 300 Lifecycle GHG emissions (kgCO2e per MWh) 285 275 270 260 Ceiling for any one consignment of feedstock 250 240 225 200 200 180 175 New-build dedicated biomass power (with or without CHP) 150 125 All other biomass power 100 2014-2020 2020-2025 Period 2025-2030 Compliance is subject to annual assurance by an independent auditor 11 UK TIMBER STANDARD UK Timber Standard is a new standard for wood-derived biomass based on UK Timber Procurement Policy • Sustainability criteria cover both environmental and social criteria – e.g.: • Protection of local ecosystems and biodiversity (soil, water quality) • Maintenance of forest productivity including monitoring • Compliance with labour rights including health & safety • Two mechanisms for evidencing compliance: • Wood to be sourced from FSC or PEFC (includes CSA/ SFI); or • Bespoke ‘Category B’ evidence (checklist) • Risk-based regional compliance approach (~100km catchment), with common rules: • • • • • • Land ownership, use and harvesting rights; Biodiversity, water, air and soil protection; Basic labour rights and health and safety of forest workers; Forestry practices e.g. waste handling, disease control, tree felling licensing and replanting/regeneration requirements. Further guidelines to be published on precisely how to evidence compliance Compliance is subject to annual assurance by independent auditor 12 WOOD QUALITY PROFILING DATA Wood profiling data is required to be submitted by consignment as part of the annual data return Aim is to monitor a) land-use change; b) potential competition with other industries Aspect Reporting details Origin • Name of forest or region of source at state/county level Forest type • Primary forest, other naturally regenerated forest, other naturally regenerated forest of introduced species Harvesting system • Clearfell, thinning, mix of the above, other Reason for harvest • • Forest was managed to supply energy and non-energy markets? Harvest made as part of a pest/disease control measure? Restocking • Intention for forest/land manager to retain forest cover, restock or encourage natural regeneration within 5 years of felling? Species • Species grouping e.g. conifer monoculture, broadleaf monoculture, mixed conifer, mixed broadleaf, mixed conifer and broadleaf Name species or genus • Saw log (1) (1) • Proportion, by weight, of saw log: None, 1-25%, 26-50%, 51-75%, 76100%. Currently defined as “wood which formed part of the trunk of a tree which grew for at least 10 years” - however, this is under review. 13 INTEGRATING GREEN IN OUR INVESTMENT PROCESS… We have developed a framework to mainstream green investment. Our ‘Green Investment Principles’ are an integral part of our investment process Principle 1 Positive contribution to a recognised green purpose Principle 2 Reduction of global greenhouse gas emissions Principle 3 Enduring green impact Principle 4 Clear and firm investment criteria Principle 5 Robust green impact evaluation Principle 6 Effective covenants, monitoring and engagement Principle 7 Transparent reporting 14 GIB’S APPROACH TO COVENANTS AND REPORTING GIB conducts due diligence and requires certain client commitments prior to investment. The following are typical requirements: Biomass electricity GHG intensity Wood quality • GHG emissions performance will be below 200 kg CO2e/MWh • Feedstock that supports mixed used of timber • Evidence of surplus fibre (low risk of product displacement) • Biomass that delivers GHG ‘payback’ over short – medium term • • Carbon stock management Supply chain sustainability risk Focused on sawmill & forestry residues or thinnings Avoid whole forest exclusively for fuel use or intensification of production • Monitor and report on forest carbon stock management, using best available data • Biomass sustainability policy committed to preservation or increase in carbon stocks • Commitment to obtain independent expert advice on sustainability risks (e.g. by country) and to comply with recommended additional sustainability procedures over time • Commitment to update sustainability practices in line with latest good industry practice (including updated Government guidelines) 15 CONCLUSION UK biomass represents an attractive market opportunity. • Significant additional capacity is expected to come online in the period to 2020. • Strong regulatory incentives are in place to support this development. GIB can act as a valuable partner in providing both funding and specialist expertise. • We have a unique market position, with a sizeable and flexible capital commitment. However, sustainability requirements are at the core of the UK biomass sector. • Regulatory incentives have embedded sustainability criteria. • Projects must meet GIB’s “double bottom line” criteria in order to attract funding. A sustainable and auditable feedstock supply is essential. 16 WE WANT TO DO MORE 17 CONTACT US Headquarters Atria One Level 7 144 Morrison Street Edinburgh EH3 8EX Tel: +44 (0)330 123 2167 London Office 21-24 Millbank Tower Millbank London SW1P 4QP T +44 (0) 330 123 3070 The information in this document and any accompanying material (“The Document”) is confidential and commercially sensitive. This Document is provided to each recipient on a confidential basis solely for information purposes only. No reliance can be placed on this Document by any recipient or any other person. This Document and its contents are confidential to the person to whom it is delivered and must not be reproduced or distributed, either in whole or in part, nor its contents disclosed by such persons to any other person without the prior written consent of UK Green Investment Bank plc. Except as required by law, neither UK Green Investment Bank Plc nor any of its connected persons accepts any liability or responsibility for the accuracy or completeness of, or makes any representation or warranty, express or implied, with respect to the information contained in this Document or on which this Document is based or any other information or representations supplied to the recipient. UK Green Investment Bank Plc will not act and has not acted as your legal, tax, accounting or investment adviser. This Document does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase, any investment and UK Green Investment Bank Plc does not arrange investments for/introduce parties as a result of sharing the information set out in this Document. Registered Office: Atria One, Level 7, 144 Morrison Street, Edinburgh, EH3 8EX. Company Number SC424067. UK Green Investment Bank Plc is wholly owned by HM Government. The company is not authorised or regulated by the Prudential Regulation Authority or the Financial Conduct Authority. 18 UK MARKET OPPORTUNITY (CONT.) Forecast growth in the UK biomass sector is underpinned by market incentives, making project economics attractive. EMR Support - Contracts for Difference Renewable Technology Draft Strike prices (£/MWh) 2014/15 to 2018/19 Potential 2020 Deployment Sensitivities (GW) (subject to VfM and cost reduction) Biomass conversion 105 1.2 - 4 Dedicated Biomass (with CHP) 120 c. 0.3 Consolidation of support bandings *From 2014/15, 0.5 ROC CHP uplift bands close, with the intention that CfD/RHI will be the primary support mechanisms thereafter 19 GIB WASTE & BIOENERGY By end March 2014, the team have completed a total of 10 transactions; We have directly committed £380m, which will mobilise a total of £2.4bn when fully deployed. Direct Investments Transaction Date Fund-led transactions GIB commitment (£m) Total GIB + private capital (£m) Transaction Fund Date Fund commitment (£m) Total Transaction (£m) Fund investments: Foresight fund Greensphere fund Nov-12 Nov-12 Fund investments total 50 100 1 1 30 60 80 160 Direct investments: Drax Dec-12 100 990 Wakefield Jan-13 30 122 Gloucester Feb-13 47 185 Evermore 2 Jul-13 20 81 Birmingham 3 Dec-13 12 47 West London Dec-13 20 224 Merseyside Dec-13 20 336 Norfolk4 Feb-14 51 226 Direct investments total 300 2,210 Total to date (inc. fund set up & direct investment) 380 2,370 Fund investments to date TEG Dagenham Foresight Aug-12 1.8 20.9 Greenlight AD Greensphere Nov-12 7.8 16.0 Evermore Foresight Aug-13 18.3 74.3 Port Talbot Greensphere Sep-13 11.3 24.9 Dec-13 5.6 11.4 44.8 147.5 Birmingham Foresight Bio Power Total fund investments to date Notes: All transactions are presented as at financial close. 1 These numbers reflect the minimum projected mobilisation of the funds. 2 This transaction was made by the Foresight fund. GIB increased its investment in the fund by £18.3m to £68.3m to finance this transaction. 3 This transaction is included twice as GIB invested directly and GIB’s Foresight managed fund was a co-investor. It is not counted twice in the corporate level mobilisation statistics. 4 Transaction has been subsequently cancelled 20